Escondido’s Realty Income buys two Napa wineries

Sale, lease-back deal is worth $269 million

Realty Income, best known for owning the buildings that house Taco Bell restaurants, LA Fitness gyms and Best Buy stores, has added a couple of posh properties to its portfolio of lunch-pail real estate — Napa Valley wineries.

The Escondido real estate investment trust said Friday that it bought Sterling Vineyards and Beaulieu Vineyard from liquor giant Diageo in a sale and lease-back transaction totaling $269 million.

The two wineries are among the most recognized in the Napa Valley, and their cabernets, merlots and chardonnays are sold under the Sterling and BV brand names across the country. The transaction includes two wineries totaling more than 394,000 square feet and nearly 1,700 acres of vineyards.

“This is the largest transaction that has ever been done of this type (sale/lease-back) in the wine business,” said Tom Lewis, chief executive of Realty Income.

The deal is Realty Income’s first venture into the volatile wine industry and is a bit out of character for a company that buys mostly safe, stand-alone retail buildings backed by long-term leases from nationwide retailers. Others have tried to create real estate investment trusts focused on the wine business without much success.

Realty Income Chief Executive Tom Lewis said the transaction made sense because of the quality of the vineyards and wineries, the prices that Napa Valley grapes command even in a down market and the strong credit rating of Diageo, which means it’s more likely to make good on its long-term lease.

Beaulieu has been in operation for 100 years, Lewis said, and gets about 50,000 visitors a year. The picturesque Sterling Vineyards — a white building sitting atop a hill — was founded 40 years ago and gets about 200,000 visitors a year.

“It’s great property in the heart of Napa,” said Joe Ciatti of Zepponi & Co. of Santa Rosa, a wine industry investment banking firm.

Diageo, the maker of Johnnie Walker whiskey, Smirnoff vodka, Jose Cuervo tequila and 62 other brands of spirits, will become Realty Income’s second-largest tenant at 5.7 percent of rents.

Under the terms of the transaction, London-based Diageo will lease back the real estate for 20 years, with several renewal options that could extend the lease for an additional 60 years.

Since it was founded in 1970, Realty Income has specialized in buying real estate from major retail brands and leasing it back to those firms under long-term agreements. It now owns more than 2,300 stand-alone retail buildings nationwide.

Realty Income’s business model allows its tenants to free up cash and put it to work in their core business, which is Diageo’s aim.

“A lot of family wineries don’t mind owning vineyards,” Ciatti said. “But big corporations don’t like to have a lot of money tied up in assets.”

For Realty Income, the lease payments provide a predictable if not spectacular revenue stream over the long term. It calls itself the “Monthly Dividend Company,” and it has issued a dividend for more than 480 straight quarters.

Realty Income financed the Diageo transaction by selling $250 million in notes with a 5.75 percent yield. They are due in 2021.

Ciatti, who operated a wine industry REIT that shut down in 2008, said it’s difficult to make a significant return buying vineyards.

“I’m sure Diageo negotiated very, very hard,” he said. “It would be hard to use a lot of public funding for this.”

But Lewis said the transaction is not typical, in part because of the quality of the wineries and the corporate strength of Diageo. Realty Income studied the wine business about five years ago but determined that only a specific type of transaction would make sense, Lewis said. That deal came along with Diageo.

Realty Income may buy more wineries, Lewis said, but he doesn’t think many exist that meet the company’s criteria.

Realty Income’s shares ended Friday up $1.21, nearly 4 percent, at $31.86 on the New York Stock Exchange.